Many see pension pots as boring, but there are a number of ways in which we can use our pensions to build our portfolios, as well as the portfolios of others.
There are three main types of pension: state pensions, defined benefit pensions, and defined contribution pensions. The key here is the the money you receive at the end, depends on the contributions that you make. The next level up from this is the SIPP (Self Investor Personal Pension), which allows you to own a commercial property.
A SIPP is one of the most tax-efficient ways of saving for your retirement. Unlike traditional pensions where investment choice can be limited, a SIPP gives you the freedom to invest almost anywhere you like. A self-invested personal pension (SIPP) is a pension ‘wrapper’ that holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension.
Every individual has a personal allowance of £40,000 per year. You can make more than £40k per year – you just wouldn’t gain any allowance upon it. The contribution can come personally or through the business. If it is from the business, you can claim it as a business expense. Remember that your pension is essentially a trust, so it falls outside of any estate.
Many of us view pensions as something that is “put on the back-burner”, and do not see as relevant for a long period of time. It’s a pot of money that we don’t see as accessible until we have reached a certain age, but actually, pensions can be utilised as a vehicle, now, to grow your portfolio, and subsequently add to your pension pot in the ensuing years.
You can buy shares in an unlisted business. The key here is that you and your lesions, combined cannot become a controlling director. You can also make a loan from a SIPP to an unconnected third-party (this is on a case-to-case basis).
The way you use your pension in terms of securing your financial future, really depends on your appetite for opportunity, and your overall plan for what’s ahead.In a defined benefit pension scheme, what you receive at the end is defined by the benefits you were on while working.
It is worth talking to potential angel investors about where their own pensions are held, and how they are being invested, as sometimes it may be more fruitful for this to be used in property. It is worth tracking down your own various pension pots, consolidating them, and strategising about the best ways in which these funds can be positioned.
The central issue in many people’s decision when it comes to investing their pension savings, is that that many people fo not know how many pension pots they have, or how to effectively consolidate them.
There are a number of stark differences between SIPPS and SSAS (Small Self-Administered Scheme), the “Ferrari” of the pension world, notably:
- SIPPS are an individual scheme
- SSAS are collective (up to 12 people)
- SSAS are all individually registered with HMRC
You can make a loan from a SSAS back to your own business. With a SIPP, it has to be to an unconnected party. The best way to consider it, is that there are two closed groups. You have the loan from the pension scheme to your business, and then whatever the business does with that money.
Features of a SIPP
- Tax-efficient – no UK income tax or capital gains tax on pension investments
- Tax relief – £10,000 in a pension could effectively cost you as little as £5,500 (£5,400 for Scottish taxpayers)
- Contribute as much as you earn – exceptions apply, find out more
- Flexible access – from age 55 (57 from 2028), take the money how you wish
The loan has to be secured as a first charge. This is why it’s important to choose the right trustee, as they all have their own risk appetite. This is further example of why knowledge is power, and why pensions can be utilised as a resource – bolstering the pension itself and allowing the utilisation of a passive investment resource, such as a pension, as a means of working behind the scenes, so to speak, to shore up a better future safe haven.
A pension, therefore, becomes a glorified savings account. It’s recognising this that makes that invaluable resource a more meaningful, precious safety net, that can work behind the scenes to ensure our future security.
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